The Housing Bubble

It’s Friday desk clearing time for this blogger. “Bob and Julie Sistik’s American dream is now in boxes after choosing to do what was once unthinkable - walking away from their mortgage. They paid $700,000 for their house in Miami in 2005 - a stretch for a firefighter and a secretary - but in the old superheated housing market, they qualified, CBS News correspondent Jim Axelrod reports. They could afford the big mortgage for a few years until Bob got hurt on the job and was out of work. By the time they tried to sell, the house was worth less than half what they’d paid for it.”

“‘I’ve totally failed,’ Bob said. ‘It’s really difficult to not do what I said I was going to do.’”

“Victoria Wilkinson hasn’t paid her mortgage for nearly two years since her husband walked out. Because of the paperwork backlog, it could take the bank three years to foreclose. Asked how she feels about people who say what she’s doing is immoral, Wilkinson says: ‘It’s not. I wanna do the right thing. But I also need to take care of myself and my son.’”

“The number of Peninsula-area properties dealt foreclosure filings in May declined 16 percent compared to May 2010, though the drop may portend an unsettling trend on the horizon. In Hampton Roads, the foreclosure backlog will continue to weigh down the market into 2012, said Perry Pilgrim, principal broker for Abbitt Realty.”

“‘There is a backlog that is building of foreclosures that have not been released onto the market,’ he said. ‘A lot of us in the real estate business are concerned that this potential inventory of foreclosure properties that are not on the market now, but will come onto the market, will continue to hold values down.’”

“Home foreclosure filings in New Jersey have dropped dramatically, according to the latest figures released by both the New Jersey Judiciary and Realty Trac. That’s the good news. The bad news is that the good news may be short-lived. Burlington County Deputy Freeholder Director Chris Brown said there is a ‘backlog of filings. … Once the judicial motion is lifted, the number will surge.’”

“Brown, who is CEO of Re/Max Connections Real Estate with offices in South Jersey, said 40 percent of people with home-equity loans nationwide have properties worth less than the loans based on their value. He added that there is a ’shadow inventory’ of short sales and properties facing foreclosure affecting the real estate market.”

“Thanks to a shadowy corporate mortgage recording system, millions of Californians have no idea who owns their home loans. As we suffer through this recession triggered by reckless subprime lending and Wall Street speculation, our recovery is being held back in part because people are struggling with foreclosures and underwater home values — exacerbated by a lack of mortgage transparency.”

“The mess created by Wall Street is causing wrongful foreclosures and wreaking havoc. We must continue to fight these wealthy, powerful lobbies so that the long road to recovery in our housing markets and communities can begin. We cannot let Sacramento forget it was financial institutions that fueled the housing bubble, crashed the stock market, and sent shockwaves throughout the economy with their reckless practices.”

“A Tucson mayoral candidate from a fringe political party has seized dozens of foreclosed homes in metro Phoenix, changing the locks, kicking out real-estate agents and posting ‘Do Not Trespass’ signs. Marshall Home, who claims many foreclosures are illegal, has filed documents in the past two weeks with the Maricopa County Recorder’s Office showing he has supposedly taken ownership of at least 21 homes belonging to government-owned mortgage giant Fannie Mae. But none of the documents shows any money has changed hands, and Fannie Mae says it has not sold the houses.”

“‘Lenders are gangsters, and they can’t prove they own these homes. So they have no right to foreclose,’ said the 80-year-old self-professed billionaire from his real-estate and political office in Tucson. ‘I plan to continue to take homes from Fannie Mae and Freddie Mac. I would buy them, but those groups can’t produce the notes showing they are the rightful owners to sell or foreclose on them.’”

“Home is tapping into a growing sentiment among homeowners angry with lenders who won’t work with them on loan modifications. ‘I haven’t been contacted by either entity nor has either one done anything to stop me,’ Home said. ‘I look forward to a call from one of them so I can explain why I am legally in the right to take over taxpayer-owned homes.’”

“Lane County foreclosures fell by 25 percent in May compared with April and were 20 percent below a year ago, according to RealtyTrac. Banks wait the full six months allowed under Oregon law to foreclose on delinquent homeowners, data from ForeclosureRadar shows. Banks finally sell the houses only when — if they didn’t act — they’d have to cancel the sale and start the foreclosure process from the beginning, company CEO Sean O’Toole said.”

“The national average for days to foreclosure is 294 — far longer than before the housing bubble and crash of recent years, he said. Banks could foreclose at a faster clip, O’Toole said. But banks don’t hurry up because it would be disastrous for the banking system and the economy.”

“‘We created $4 trillion in excess debt that we really can’t afford as a nation. So far, we’ve only dealt with a half a trillion,’ he said. ‘If bank policies were to change to make short sales easier or to more aggressively foreclose or do anything other than to drag this out, the losses would be so substantial we’d have a second banking crisis.’”

“Yesterday morning, my colleague (S.C. | HONG KONG) sent around an interesting piece of analysis from GaveKal capital, which read in part: We were once told by a client that ‘when the US government decides to sell, no price is cheap enough.’… If the above is true, then there must be some fortunes to be made in US housing today, for not only is housing trading at very attractive levels against incomes and ability to service a mortgage, but the US government, through its GSEs, is also proving to be a very willing seller.”

“Indeed, in 1Q11 the GSEs collectively sold 110,000 foreclosed homes, representing 10% of total housing sales. This liquidation of foreclosed homes is likely to increase in the coming months, as more foreclosure processes are completed. There are already 600,000-900,000 foreclosed homes on the books of financial institutions (285,000 of these with the GSEs), and a further 2mn+ properties in the foreclosure pipeline (not to mention another 2mn of >90-day-delinquent mortgages for which the foreclosure process has not started).”

“Thus, if foreclosures continue at the same pace as in the first quarter, then the GSEs will own approximately 600,000 properties by the end of the year, with a book value of $95bn and all indications are that the GSEs plan to continue selling these properties onto an already-bloated market (thereby pushing prices down and curtailing the nascent recovery).”

“This generated an interesting email conversation…S.C.: Do people stop repaying their mortgage just because they are in negative equity? I understand why they ’should’—with a non-recourse mortgage, you can walk away from a debt worth X, for the loss of an asset worth less than X. But in practice don’t people keep paying their mortgage as long as their income is sufficient, regardless of what has happened to their balance-sheet?”

“If so, then I’m with [G.I.]—best cure for low prices is low prices. The excess supply is real. Might as well let prices reflect that. House prices may undershoot, but I don’t think this undershooting will produce a fresh round of defaults immediately–because people keep paying their mortgage as long as they can. By the time they are ready to default in disgust, the price may well have recovered to its equilibrium, resolving their negative equity problem.”

“It’s odd that buyers are smart enough to see the overhang and act accordingly (by waiting to buy), but private sellers aren’t. To put it another way, why isn’t the overhang already priced into the market?”

“The great American dream has been a nightmare of late, especially when it involves foreclosure. Some industry analysts say housing is in a downward spiral, not only because so many people are blocked from the market - being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage - but also even many who are solvent are opting out.”

“Another somewhat related trend is that more and more of us are upside-down on second mortgages, according to the Home Buying Institute. Is this reason to put the idea of homeownership to sleep? Not at all.”

“A study this past month by the Pew Research Center states 75 percent of Americans see owning a home as the best long-term investment they can make. Further, the study - coupled with Census data - shows owning a home remains a goal of young people with jobs. Problem: Not enough people have the jobs or resources that will make this happen.”

“The local housing market is recovering, as evidenced by sales data we publish each Friday in the Real Estate section of the Courier. Foreclosures represented about 35 percent of existing home transactions in May, compared with 36 percent in April, 38 percent in March and 43 percent in January.”

‘How long the trend may last is anybody’s guess. ‘Full recovery is a misnomer,’ the Home Buying Institute stated. ‘The market may never again look like it did five years ago.’”

“We’re not sure that’s a bad thing, either.”